One of the goals of investors and regular individuals who take financial management seriously is maximizing profitability. There are different strategies and techniques to maximize profitability. One can be through asset management. Under asset management, there are also various tools to assess and discover which investment and asset acquisition decisions can earn the most profit for oneself or a company. More so, in asset management, cost-minimization on acquiring and selling assets can also contribute to achieving the goal of profit-maximization. Cost-minimization manifests in the analysis of unnecessary expenses or necessary expenses which can be reduced, minimized, or deferred.
Also, being skillful in investment decision-making has been proven to be essential in achieving financial prosperity. The most successful people are known to allocate a portion of their earnings to profitable investments. For some, their earnings are heavily composed of investments alone.
For investors, there has been a solution that offers both cost-minimization benefits and income-generating investments. A great number of investors have been turning to the utilization of Section 1031 DST exchanges for this, and here’s how it solves their problems.
Defining the Problem
Taxes are one of the expenses that can greatly affect and reduce what could have been your net profit. There are different kinds of taxes, but one that often causes dilemmas for investors is capital gains taxes. Additionally, managing investments in itself can also burden investors. When these investments become neglected because of other valid/invalid reasons, what you may gain from selling this investment can be less than what you have actually paid for acquiring it in the first place.
Identifying the Strategies
Section 1031 of the Internal Revenue Code allows you to sell your property without imposing a tax on the sale. However, the revenue that you will gain from the sale must be invested into a like-kind property so it would seem that you only swapped the property you originally had into another one which you deemed to have a greater value and profitability rate. This results in a modification of the narrative where instead of a sale, Section 1031 recognizes it as an exchange. Since it is not considered a sale, the capital gains taxes are deferred and transferred to your new investment property. The tax obligation will only be reflected once the replacement property you had invested in the latest is sold in a taxable transaction.
Evaluating the Solution
Under Section 1031 exchanges, a Delaware Statutory Trust (DST) is one of the beneficial solutions in finding and investing in exchanges. A DST qualifies as a replacement investment for a Section 1031 exchange. It is a legal entity that has similar attributes to a Limited Liability Company. Through DSTs, investors are protected from possible liability and accountability issues that may arise in the long run. More so, the main benefit, a tax deferral, that you expect to gain from a Section 1031 exchange is surely provided by choosing to invest in a Delaware Statutory Trust. Management roles are also as minimal as possible unlike in investing in a like-kind property which is not to be managed by a trust where there are different factors to regularly oversee. A Section 1031 exchange under a DST contributes passive income for investors and because it’s specifically real estate properties, you know its value appreciates through time.